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Asset Watch
Tuesday, December 24, 2024
After the FOMC reduced its 2025 rate-cut expectations and Chairman Jerome Powell struck a hawkish tone, a Wall Street temper tantrum sunk the S&P 500. However, Friday’s comeback recouped some of the losses, so now the million-dollar question is whether we should expect a ‘Santa Clause rally’ this year.
Does the data support cheers or jeers over the next couple of weeks?
Carson Group’s Chief Market Strategist Ryan Detrick wrote on Dec. 20, “With stocks extremely oversold going into this historically strong time of year, we’d expect to see a bounce to close out a solid year…
“The real [Santa Claus rally] is the final five trading days of the year and first two trading days of the following year. In other words, the official SCR is set to begin next week on Tuesday, December 24, 2024.
“Historically, it turns out these seven days indeed have been quite jolly, as no seven-day combo is more likely to be higher (up 78.4% of the time), and only two combos have a better average return for the S&P 500 than the 1.29% average return during the official Santa Claus Rally period.”
As a result, history favours the bulls over the next several days.
The vertical white lines highlight the S&P 500’s weekly performances during and around Christmas since 2018. Mixed short-term results were present, but the weeks ahead were bullish during five of the six periods.
The risk-reward supports an end-of-year comeback for the index.
If you analyse the movement of the blue line, you can see that the 20-week moving average is an important long-term trend indicator. In 2020/2021, several bounces occurred near the 20-week MA as the bull market raged on.
2022 also saw sell-offs near the 20-week MA, as the metric helped end several bear market rallies.
The 20-week MA is still support, and the S&P 500 rallied within roughly 20 points of the metric last week. As such, we may have already witnessed a bottom.
Since the historical data supports an optimistic outlook, a holiday rally could hinge on the behaviour of Treasury yields. With interest rates ripping higher recently, they helped encourage the recent sell-off. But if rates behave this week, it could be enough to facilitate higher stock prices.
As long as the S&P 500 holds above the 20-week MA (which is near 5,781 and should keep rising), the medium-term upend remains intact.
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